To invest or not to invest?

After having spent the last fifteen minutes going around the house recycling bits and pieces of mail that I have no need to file, I've just signed into my online 403(b) account to register for e-delivery of all prospectus materials. Every quarter I receive a giant packet of information that I never read---I rarely change my allocation, and lately I've not even looked at my statements. In fact, I haven't checked my balance in over six months.

Although all I wanted to do was indicate e-delivery for all correspondence, it was impossible not to take a quick glance at my statement while on the website. My 403(b) account has decreased a stunning 21% since last quarter (September of 2009) and before that, it lost about 9%!!! That's about a 30% loss over the past six months---I now have less in that account than I've actually put into it!

Now, in December, I raised my monthly contribution from 1% to 15%, something that I had promised myself I would do last spring, when I really ramped up my credit debt repayment plan. Now that the credit cards are finally paid off, I can begin sending money to my 403(b) account again. But should I?

The thought of sending around $450 each month to an account that might just shrink further and further seems pointless. However, when I think about it from a 'sale' point of view (and oh, do I love a sale!) my $450 dollars is probably buying more shares than it would have purchased in January, 2008 (assuming I were contributing as much as I am now). Although scary, I think the best thing to do is to take advantage of these historically low prices on stocks that will (hopefully, fingers crossed!) increase in value exponentially over the next ten to twenty years.

In looking for answers to my conundrum online, I didn't find much that contradicted my own instincts. I did, however, find this gem of a quote from Warren Buffet, one of the wealthiest men on earth:

“Investors should be brave when others are scared and scared when others are brave.”
–Warren Buffett

Finally Frugal goals for 2009

I've never been one to make a resolution on New Year's Day, because that just seems to be inviting failure. However, this year, I'd like to create a list of goals so that when 2010 rolls around I can look back and really measure my progress.

Now that my credit card debt is paid off, my financial goals revolve around keeping to a frugal budget and saving a nest egg for the 2009-2010 academic year, when I won't be able to work full time due to school obligations.

So, here goes:

• Use the cash-envelope system for my 'fun money' and 'grocery money' in the zero-based budget; hopefully this will allow me to stay within my allotted amounts, as these two areas have been challenging for me in 2008.
• Engage in a modified 'Compact' to only buy used items. A reader suggested that I give myself three 'freebies', an idea that I like. However, I think I'll double that to six 'free' new items that I can purchase throughout the year. I'll continue to buy new items in the personal hygiene categories as well as for true needs that I'm unable to find used. I'm hoping that this goal will help me curb my desire for new shoes and clothes (of which I have more than enough already). Also, I'm giving myself permission to purchase new gifts for birthdays and other events (for other people) since my busy life doesn't allow for much creative crafting at this point.
  
• Increase my 'Internship Year' savings account from $365 to $4,500 by September of 2009, at which time I'll need to work less than full time. This money will help 'bridge the gap' during my internship year.
• Send 15% of my gross salary (from the day job) to my 403(b) account, at least until September of 2009. This will lower my tax liability as well as take advantage of currently low stock prices.

These goals will hopefully help me stay on track as I continue to work toward financial independence this year. What are your goals for 2009?

Frugal economy. . . .

The more I read about our collapsing economy (I'm an internet news addict, these days), the more I thank my lucky stars that I began paying off debt and saving money almost 12 months ago. One of my bank accounts (no longer used for anything other than ATM withdrawals) is at Washington Mutual, which, as I'm sure you've heard, 'failed', was taken over by the government, and is subsequently being sold to J.P. Morgan Chase. Incidentally, I heard this news late last week; by today, my ING Account showed not 'WAMU' as a linked account, but in fact 'J.P. Morgan'! They certainly didn't waste any time!

Last week (or, geez, was it only a few days ago?), I wrote about my upcoming lump sum payment for a retroactive pay increase. I intend to send this money to my credit card, paying off about $1,000 in debt in one fell swoop! I also contemplated using some of my emergency fund (of which I have $1,600) to pay off the rest of my credit balance. Several commenters thought I should keep the emergency fund as it is, 'just in case'.

I'm definitely leaning in that direction, folks, not only because of the points my commenters brought up, but also because of this financial article, reminding readers what to do in an economy like ours. Basically, the author suggests that we should act as if we were preparing to lose our jobs! In short, this means:

• Decreasing contributions to a 401(k) or 403(b). I already did this last spring, when I became determined to pad my emergency fund (something the author recommends) and pay down my credit when a labor strike seemed imminent.
  
• Eliminate unnecessary payroll deductions. The author uses charitable donations as an example, which seems sad. However, I suppose in the long run a strategy like this would work better for charities anyway; keeping oneself healthy financially in the short term would allow one to increase donations in the future.
• Reduce income tax withholdings. Or, put another way, decrease the money that you'll receive as a refund later and increase take-home pay now.
• If you're still brave enough to be investing in the stock market, diversify. Personally, I don't have the stomach to even look at my tax deferred investment account, let alone play with the contributions.
• Pay off any 401(k) loans. Hopefully none of us have taken a loan on our retirement!
  
• Research life and health insurance options, in the event of a layoff. Find out how long you're covered and for how much; if you're lucky enough to have a spouse or partner who has coverage, consider switching to their plan.

So there you have it. Luckily, I'm already doing all of these things and more, although I'm still nervous, of course. My job is secure---for now. But it's nice to have even a smallish emergency fund to back me up in the event of a financial meltdown.

In other news, Dave Ramsey's coming to town on November 1st, and I can't decide if I want to shell out the $36 it would cost to see him in person. I know it would be a great motivator and reminder---Dave's book, The Total Money Makeover, is one of the first financial books I read that catapulted me into my frugal lifestyle. I'll have to see how much money is left in my checking account after I've sent my mega-payment to the credit card company later this week!

Work for the rest of my life? Uh, no. . . . .

I just read an incredibly interesting (and somewhat shocking) article on MSNBC called "Gen X shrugs, says 'whatever' to retirement". Apparently, a majority of my peers (the 'Gen X' crowd, aged 27 to 42) don't believe they'll ever have the funds to retire! How did my generation become so pessimistic? I know that most of us don't believe Social Security will be worth much, if anything, by the time we reach the age of 67, but how can more than two-thirds of us believe that we'll need to work forever?

I truly believe that I'll have the financial security to retire at some point. Granted, when I 'retire' from full time work (hopefully by 59 1/2) I'll choose to work part time somewhere else for the benefit and for the social outlet. I've learned that in order to do this, I need to do some planning of my own.

How do I know this? Two reasons: my mom and my dad. My mom contributed money to her 403b fund and also has a government pension. She planned. She retired in her early 60's. My dad, who owns his own business, never (and I do mean NEVER) put a penny into a savings account or an investment vehicle. He is still working as an electrician at the age of 74---he can't afford to retire.

What have I learned from this?

• Don't count on social security


• In fact, live and invest as if social security didn't exist
• Contribute to a tax-deferred investment---whether a 401K, 403b, or IRA early and often
• Live below your means
• Pay off debt, whether it be credit card, auto, or mortgage loans

Do my peers in Generation X think that we shouldn't have to lift a finger to provide for ourselves in retirement? Do they believe that Social Security was intended to provide for all of our needs when we could no longer work (it wasn't)? Did our parents provide too much for us when we were young, instead of teaching us that success and security are a result of hard work and planning?

I, for one, do NOT intend to work full time forever. Apparently, this places me in the minority when compared with my Generation X peers.

Preparing for a strike. . . .

As I mentioned in yesterday's post, my labor union may very well call for a strike in the next 60 days. I do have $1,000 in my emergency fund, so I'm feeling somewhat comfortable with the idea of not earning any money for a few days (as long as it's no longer than a few days!)

However, thinking about the possible financial ramifications of striking has led me to consider whether I should deposit my 'debt repayment' money into my emergency fund for the next two months, just to beef it up a little more. I lowered contributions into my 403b last month, so that I would have $550 free to use toward credit card debt, beginning in the month of May.

Should I put off the oh-so-sweet (so sweet I can almost taste it, folks) notion of being consumer debt-free by August? It's possible that the extra money won't be needed at all, and after the threat of strike has passed (hopefully with an adequate salary increase, to boot) I can take it out of my EF and send it merrily along to American Express.

Just for kicks, I updated my debt spreadsheet, which is shown below. As you can see, I've paid off $1530.84 in the past two months (primarily using my tax refunds, but also increasing the amounts I'm sending from my salary). Two of my cards are completely GONE! Only one more remains. . . . !

The tax rebate dilemma . . . .

According to an article at MSNBC, Americans may not be spending the upcoming tax rebate in the way politicians and economists would like us to. The idea behind the rebates is to strengthen our weakened economy by bringing more money to the market; Americans are expected to spend their 'windfall' on items such as TV's, clothing, vacation travel, and other goods.

However, it appears that at least some of us may be planning to use the money to pay down debt or increase savings. With the shaky state of the economy, families are wondering if it might be better to have that $1200 or $600 in the bank rather than frittering it away on a new, fancy BBQ or car stereo. In fact, much of the money might already be earmared for increased fuel costs, which according to the MSNBC article, won't do much to help the economy since most of that money goes to our overseas oil suppliers.

Despite the hints that the rebate money might not enter the economy for quite some time, some economists are counting on Americans' inability to live frugally. For example, David Wyss, a chief economist at Standard and Poor's, says this: "Americans have an amazing ability for self-deception, and I have full confidence that they’re going to end up spending the money regardless of what they say they’re going to do with it.”

I feel a bit insulted by this comment! Mr. Wyss is saying that no matter how smart we think we are, our instinctual drive to consume will trump our intelligence. For my part, the rebate check will be going directly to debt payment. This will (if all goes to plan) more than double my monthly payment to the credit card company, and will result in my credit card debt disappearing a full month sooner than expected! Now THAT is smart, and no amount of advertising or consumption lust will convince me to spend that money on items I don't need, which were probably produced overseas, anyway.

If you haven't decided how to spend that rebate check, here are some ideas to consider:

How about buying yourself some freedom? Freedom from debt, that is. Do you carry a credit card balance? Have you been ignoring it, paying the minimums month after month? Why not pay it down (or off)? Consider the satisfaction you'll feel as you watch your balance shrink, along with your minimum monthly payment.

Split the rebate. Are you a family of four? Are you receiving $1200? How about dividing that by the number of family members and allocating the money this way: $300 to debt repayment; $300 to retirement savings or emergency fund; $300 to the upcoming camping trip; and $300 toward that new TV or other purchase.

If you purchase, buy American! If you decide the use the rebate check to buy something fun (or necessary), make sure you're purchasing something that was made in America! I know, I know, this is almost impossible these days, especially in the case of electronics or appliances. However, the only way the rebate will serve its true purpose (to improve the American economy) is to buy items made by Americans. An alternative to buying a thing would be to travel domestically---this also benefits Americans.

So, I'd like to know: what are YOU going to do with your rebate check?

The Middle Class Millionaire. . . .

I’ve been reading many of the posts at the Early Retirement forum, which led me to do a little reading about people who appear to be on a path to millionaire status through their own hard work, commitment to saving, and smart investment strategies.

In The Middle-Class Millionaire, Russ Alan Prince and Lewis Schiff take a page from The Millionaire Next Door, and suggest that ‘middle-class millionaires’ are different enough from all of us regular Joes (or Marys) that they can be studied as a unique group. And, of course, the reason we’d want to study them at all is so that we can emulate them and become millionaires ourselves.

The authors define ‘middle-class millionaires’ as having a net worth that falls between $1 million and $10 million---including the equity held in their homes. Importantly, Prince and Schiff point out that their millionaires became wealthy not through inheritance but through hard work. In other words, these millionaires are self made. These millionaires were then compared to a sample of middle-class families with incomes between $50,000 to $80,000 and with net worth of less than $1 million (whom I'll call the 'non-millionaires').

What they found was interesting. For example:

• Middle-class millionaires are always ‘on’. While both millionaires and non-millionaires alike believe the statement “Anyone can become a millionaire if he or she works hard enough”, millionaires work, on average, 70 hours per week, as compared to 41 hours per week for non-millionaires.
• Millionaires are five times more likely to say that they are always available for business by email or phone (76% versus 16%)
• They are three times more likely to say that they regularly work weekends (67% versus 21%)
• They take fewer vacations than non-millionaires (12 days versus 19.5 days)
• Middle-class millionaires believe in networking. They believe that knowing many, many people is crucial to success.
• Millionaires are three times more likely to say they belong to a formal or informal networking group (43% versus 16%)
• They value networking as a way to connect with people you can turn to for information (83% versus 29%)
• Middle-class millionaires never give up. Nine out of ten respondents in both the millionaire and the non-millionaire groups reported having had a serious setback with a very bad outcome. However, millionaires had 3.1 such incidents, while the non-millionaires had 1.6.
• Millionaires were twice as likely to credit learning from these bad experiences as being very important to their eventual financial success (73% versus 36%)
• Millionaires were five times more likely than those in the middle-class non-millionaire sample to try again in the same field, after a setback (77% versus 14%)
• Only 2% of millionaires reported that their most common course of action was to give up and focus on other projects In the middle-class non-millionaire sample, 51.5% reported giving up.
• Millionaires go where the money is. Middle-class millionaires can more often be found in ownership of a business, or in businesses with incentivized or pay-for-performance compensation.
• Millionaires are three times more likely to say that choosing a career on the basis of its prospective financial rewards is important to financial success (73% versus 28%).
• Non-millionaires were more likely to believe in the idea of “do what you love and the money will follow” (54% versus 2%)

In all, there do appear to be some important differences between the middle-class millionaire and the non-millionaire. If you want to be a millionaire, as many in the Early Retirement forums do (and, truth be told, as I do), you may want to check this one out at the library.

Later in the week, I’ll present some of the differences that made me a bit squeamish about the middle-class millionaire route to financial success. . . .

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Rich by 30. . . . .

Last week, while perusing Wise Bread, I came across a review for a book entitled: Rich by 30. I left a comment thanking the poster, Lynn Truong, for her review. Amazingly, Ms. Truong emailed me and offered to send me her copy of the book, with the caveat that I donate the book to my local library when I was finished. I happily accepted, and the book arrived on Saturday!

Although I had a friend visiting this weekend and was therefore busy, I was able to go through the book at lightning speed. It's truly basic, and much of the information presented will be familiar for anyone with an interest in personal finance. I commented to my friend that it would be an amazing gift for a teenager just starting his or her first job. How I wish I had had the wisdom to start saving (even just a little bit!) at the age of 16, when I got my first job!

Thanks, Lynn, for the book! I enjoyed reading it, and will pass it along to the Multnomah County Library system this week, so that others in my area can benefit from it as well.

What's going on in the blogosphere. . . .?

It's pretty quiet in my personal finance world, so I thought I'd create a compilation of recent posts from other personal finance and/or frugality blogs:

Lynnae at BeingFrugal posted a great article with suggestions for frugal spring break activities. For those with kids, there are some helpful tips on how not to blow the budget while entertaining the children.

Along the same lines, FrugalMomLA has posted some links to websites for the pre-Kindergarten to grade 2 kiddos.

J.D. over at Get Rich Slowly asks the question, "how to live simply, without looking cheap"? Something I've struggled with as I attempt to have a social life while living frugally.

Meanwhile, Moolonomy explains why a penny saved is actually better than a penny earned.

The Simple Dollar (which I haven't visited for quite some time) reviews a book called The Little Book that Builds Wealth. This is book five of a series of investment books by Wiley Publishing. Today, maybe I'll do a search of the site for a review of the first in the series, so as not to miss anything.

As for me, I'm all set to go out and help and friend celebrate her birthday tonight, and am planning to eat before I go----and I'll be driving, so that means my alcohol consumption will be limited. I'm hoping to keep the entire evening under $10, including the drink I plan to buy for the birthday girl.

Frugally optimistic. . . .

I'm actually feeling rather optimistic about my finances (or, rather, my future finances) lately. Which is good, because sometimes I can become so depressed and hopeless about the sheer volume of my debt that I need to go out immediately and buy a pair of shoes or some Almond Roca to soothe my anxieties.

The reason for my optimism? Well, my March zero-based budget is done (and it doesn't look half as bad as I predicted), my April budget is shaping up, and I've decreased my 403b contributions to 1% of my salary until my credit card is paid off and my emergency fund has doubled (to at least $2,000, though hopefully more). I'm hoping to put $550 a month onto my credit card starting next month, which should shave a month off of my ETR (estimated time to repayment).

I took the step of creating an estimated future budget based on NO CREDIT PAYMENTS, and while I'll still struggle, I'll be able to sock more money away into my emergency fund in 2009, while beginning to tackle my student loans (currently around $55K) or double the payment on my second mortgage.

I've put a reminder on my electronic calendar for January of 2009, at which time I'll up my 403b to 5% and open a ROTH IRA for another 5-10%. Writing this post just gets me more excited to reach some of my financial goals!

Stock market pain. . . .

Awhile ago, I wrote about my 403b account, and my daily obsession with its value. Once the stock market started wobbling, I vowed to check it once a week---no more. Watching the value drop even as I continue to contribute 10% of my gross each month was simply too depressing.

I'm proud to say that I lasted longer than a week! It's actually been TWO weeks since I last checked my balance online, and as I suspected, the results were dismal. It's clear that in spite of my own contributions, the value has dropped precipitously, and probably won't be increasing any time soon.

So, should I stop my contributions? Put the money elsewhere? I think not. My opinion (possibly unfounded and based on instinct, granted) is to continue my contributions to take advantage of the lower stock costs now. Hopefully this will pay off later when (not IF) the market rebounds. This could take some time, of course. But then, I'm not going to be retiring for another twenty years anyway---and anything could happen during that time.

Note to self: don't check mutual fund balances daily.

In the past two months, I've checked my 403b account balance (through TIAA-CREF)dozens and dozens of times. I watched the balance inch painfully upward, only to plummet the next day when the latest oil prices or inflation indexes were announced.

Each time I logged into my account, I warned myself: "It doesn't matter; you won't be retiring anytime during the next 20 years, so whether it's up or down just doesn't matter". That, unfortunately, doesn't make it any less painful to watch my contributions (and the interest earned over the past 8 years or so) diminish before my very eyes.

The Money Blue Book has a great post about this issue, reminding us that if we're really in it for the long term (I am! I am!) then don't worry about stock prices on a daily (or, in my case, minute-by-minute) basis. Sure, follow the general business news, but don't bother with stock tickers at the bottom of your computer screen or television (unless, of course, you're into individual stock purchases and are looking for good deals---I'm a mutual fund gal myself).

I'm going to try to keep my habit of checking online investment balances at once a week from now on, if that. Maybe even once a month if I can possibly stand it, just to save my sanity. FYI: Millionaire Mommy Next Door has a great post about how she handles the recent market rollercoaster. . . . .

The Middle Years. . . .

Click here for my post on the Early Years. . . .

I returned to sunny California from graduate school on the East Coast in 1998, still blissfully ignorant about the true state of my finances. I decided to try my hand at a marketing position at one of the new internet start-ups that dotted the Bay Area. Living with family in Marin County (that was nice!) while attempting to find a ‘room’ (aka closet) to rent in San Francisco on my $25,000 a year salary (not so nice!), I could have used this rent-free period of about three months to save some money. Did I do this? Of course not! I bought a car! Isn’t that what every new graduate with $50,000 in debt does?

In my defense, it was not a new car, by any means, and it wasn’t sexy or fast (it was a tiny Honda Civic, over five years old at the time). As humble as it was, I still had to finance it and make a monthly payment. In addition to my credit card payments, and the soon-to-be $600 a month student loan payments. Did I mention I consolidated my student loans at the low, low rate of 8.25%?

As it became clear that I wasn’t going to find a room to rent in San Francisco without some major cash in hand, an office at the university I attended for my undergraduate degree called---they had a job opening, and it was actually related to my graduate degree!

In desperation I returned to my hometown, and took the university job. Slightly better pay and excellent benefits (including an actual pension) made me feel like my ship had come in. Why, with all the extra money I’d be making, I felt comfortable enough to sign a lease on an expensive apartment, and bought some new furniture and clothing. Somehow forgetting about the car payment, the credit card payments, and the looming student loan payments. . . .

I’m amazed when I read blogs by people in their 20’s, who actually GET the fact that saving is a good thing. That contributing to a 401K (in my case, a 403b) is a GREAT thing. That paying off credit card debt is a guaranteed investment. None of these concepts even entered my mind.

I kick myself for not starting earlier, for not being ‘smarter’. Then I remember that at least I get it NOW. Yes, it’s 20 years later than I would have preferred (I’m 38 now). Yes, I could probably retire in a few years had I started saving when I was 18. But I didn’t. I’m grateful that the stars finally aligned at the right time in exactly the right configuration for the light bulb to go on over my head.

Tomorrow, I’ll write about where I am now, financially, and more importantly, where I’m headed!